Israel: Could Mexico Beat The U.S. To NAFTA Withdrawal?

One of the major promises of President Trump's campaign was
to renegotiate the terms of, or alternatively withdraw from, the
North American Free Trade Agreement (NAFTA). According to a recent
Congressional Research Service report, a renegotiated NAFTA with
significant changes would likely have to be approved by Congress
prior to implementation.1 However, after the
highly-publicized cancellation of a meeting with Trump by Mexican
president Enrique Peña Nieto, any renegotiation of the trade
deal may be doomed before it even begins.

President Trump has always left the option of simply leaving
NAFTA on the table in case a renegotiation does not occur or is
insufficient. The United States has the power to unilaterally
withdraw from the agreement under Article 2205 of NAFTA, which
says, "A Party may withdraw from this Agreement six months
after it provides written notice of withdrawal to the other
Parties." Unlike implementing a renegotiated NAFTA, President
Trump would not require approval of Congress to withdraw from the
agreement. Section 125 of the Trade Act of 1974 gives the right to
terminate and withdraw from tariff and non-tariff barriers to the
president.

The question of whether NAFTA is simply renegotiated or
completely abandoned may no longer be only in the hands of the
Trump administration, however. After a long campaign of usually
unflattering rhetoric directed at Mexico and culminating in the
cancellation of the Peña Nieto meeting, many Mexicans have
become united in their frustrations with their northern
neighbor's new president. There is a notable rise within Mexico
of anti-NAFTA sentiment, even though the trade agreement has been a
boon for most of the country. Whether or not the intense feelings
of a large segment of the populace will turn into Mexican
government action remains to be seen, but if either Mexico or the
United States withdraws from NAFTA, there will be huge consequences
for both sides. Without another free trade agreement in place,
tariffs between the two countries would be based on limits imposed
by the World Trade Organization (WTO) agreements. Due to most
favored nation (MFN) rules set by the WTO, Mexican tariffs can be
much higher than tariffs imposed by the United States.
Specifically, under MFN tariff rules, a U.S. tariff increase
against Mexico would be limited to a general maximum of 3.5
percent, while Mexico could increase its tariffs as high as 36
percent.2 Although, President Trump could avoid the MFN
tariff restrictions by withdrawing from the WTO altogether, a
measure he suggested during his campaign and which would have
enormous effects on global trade and our international relations
with other countries.3

Some notable Mexicans are already preparing for a potential
trade war with the United States in the event that either nation
gives notice of withdrawal from NAFTA. In a television interview in
late January, former Mexican president Felipe Calderon suggested
retaliation to Trump's proposed plans in the form of higher
duties on U.S. products from key industries from U.S. states
represented by the most aggressive legislators.4 The
goal of this response would be to force affected American
businesses and Congressmen to lobby for NAFTA before the Trump
administration. Mexican billionaire Carlos Slim called for a
"modern" program for replacing imported goods from the
United States and said Mexico should have a measured response
"without getting angry but without
surrendering."5

On February 1, the Mexican government announced that it was
beginning a 90-day period of consultation with private industry in
preparation of potential NAFTA negotiations in May.6 The
final outcome of any NAFTA renegotiation, or lack thereof, is as
yet unknown, but regardless of the result, the next few months are
shaping up to be very interesting with regards to U.S.-Mexico trade
relations.

**Please feel free to contact us if you need assistance in
ascertaining the potential impact of NAFTA renegotiations (or
withdrawal) on your company's operations.

Footnotes

1 Legal Sidebar: Renegotiation of the North American Free
Trade Agreement (NAFTA): What Actions Do Not Require Congressional
Approval?, CRS Reports & Analysis (Jan. 26, 2017), available at
https://fas.org/sgp/crs/misc/re-nafta.pdf.

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